Market Price Control Mechanism in the Stock Market: What Are Upper and Lower Limits?

Why Are Price Limits Important for Traders?

In each trading session on the Vietnamese stock market, all securities have a pre-set price fluctuation range. These limits are not random; they are designed by the State Securities Commission (SSC) to protect investors and maintain market stability. These two numbers are called the upper limit (ceiling price) and the lower limit (floor price), and they directly influence your buying and selling strategies.

Definition and Nature of Price Limits

Upper limit is the maximum price at which a product can be traded in a session, shown in purple on the electronic price board. Lower limit is the minimum price set, usually displayed in light blue.

For example: KDH stock has an upper limit of 41,000 VND and a lower limit of 35,700 VND. These levels are calculated based on the reference price (closing price of the previous session) and change daily according to market fluctuations.

How to Calculate Price Limits

Basic Formula for Stocks and Futures Contracts

Calculation methods vary depending on the exchange:

Upper limit = Reference price × (1 + fluctuation margin %)

Lower limit = Reference price × (1 – fluctuation margin %)

The fluctuation margin is determined as follows:

• HOSE: 7%
• HNX: 10%
• UPCOM: 15%

Practical application: Suppose HPG stock has a reference price of 24,000 VND/share on 08/10/2022, traded on HOSE with a 7% margin:

→ Upper limit = 24,000 × (1 + 7%) = 25,680 VND

→ Lower limit = 24,000 × (1 – 7%) = 22,320 VND

Option for Warrants

Warrants use a more complex formula, linked to the underlying stock price:

Upper limit = Warrant reference price + (Upper limit of the underlying stock – Reference price of the underlying stock) × (1/Conversion rate)

Lower limit = Warrant reference price – (Reference price of the underlying stock – Lower limit of the underlying stock) × (1/Conversion rate)

Example: CFPT2205 warrant has a reference price of 1,240 VND/CW, conversion rate 6:1; FPT stock has an upper limit of 92,234 VND/share, lower limit of 80,166 VND/share, and a reference price of 86,200 VND/share:

→ Upper limit = 1,240 + (92,234 – 86,200) × (1/6) = 2,245 VND

→ Lower limit = 1,240 – (86,200 – 80,166) × (1/6) = 234 VND

If the calculated lower limit is less than or equal to 0, it is set at the minimum quote level of 10 VND.

Benefits of the Price Control System

Protection against price manipulation: The upper limit prevents large-cap traders from arbitrarily pushing prices up, while the lower limit protects against massive sell-offs.

Minimize losses: During high market volatility, the lower limit acts as a “safety shield,” helping investors limit losses in a trading session.

Maintain fairness: This system ensures trading opportunities are more evenly distributed among investors.

Limitations to Note

Reduced liquidity: When a stock hits the upper limit with huge buy orders but no sellers, or hits the lower limit with large sell orders but no buyers, trading can almost come to a halt.

Limited profit opportunities: If you hold a stock that is rising strongly, the upper limit may cut short your potential gains.

Risk of being stuck: If you want to sell but the price is at the lower limit, you may get stuck and unable to exit your position.

Market psychological effects: When many large stocks “hit the floor” simultaneously, especially those with large market caps, it can trigger a broad sell-off across the entire market.

Trading Strategies When Price Limits Are Triggered

When a Stock Hits the Upper Limit

If a stock hits the upper limit with large buy orders at the end of the session, this indicates very strong demand. As a profitable trader, you can:

• Wait until the next session to take profits at a higher level
• Partially sell to lock in gains when targets are reached
• Monitor further if selling pressure is also high, indicating uncertainty

When a Stock Hits the Lower Limit

This situation requires careful judgment. If the lower limit appears alongside:

• Large sell orders waiting
• Bad news or strong market volatility
• Low liquidity

You should consider selling to avoid further losses, unless you see signs that demand remains strong at this limit.

Key Points for Traders

The Vietnamese stock market operates on a T+1.5 (regulatory framework by the Vietnam Securities Depository - VSD), meaning you cannot buy and sell immediately within the same session. This requires:

• Careful analysis of the product’s trend when the price hits limits
• Avoiding FOMO (Fear of Missing Out) when seeing the ceiling price
• Not rushing to buy the dip at the floor price without evidence of demand
• Closely monitoring supply and demand at these limit levels

Frequently Asked Questions

What is the difference between price limits and the high-low prices within a session?

Limits are calculated beforehand based on the reference price, while intra-session high-low prices are determined by actual supply and demand. The high-low prices may never reach the limits.

Do derivative markets have price limits?

Vietnam’s derivative markets have regulations on price limits, but most international derivative markets do not; they follow market supply and demand.

Are there price limits in the cryptocurrency market?

No. The cryptocurrency market has no fluctuation limits, allowing prices to move freely.

Which markets do not regulate price limits?

Markets such as international derivatives, CFDs, forex, commodities, and cryptocurrencies typically do not have price limit regulations. This depends on the Securities Commission of each country.

Understanding the mechanism of price limits in the stock market is a crucial step toward becoming a successful trader. By grasping the calculation formulas and knowing how to apply them in your trading strategies, investors can optimize profit opportunities and manage risks more effectively.